ASSESSING CONSTRUCTION THE ROLE OF INTERNAL AUDIT CONSULTANT ROBERT S. BRIGHT PRESIDENT TALSON SOLUTIONS LLC

Transcription

1 1 ASSESSING CONSTRUCTION AUDIT RISK: THE ROLE OF INTERNAL AUDIT AND THE EXTERNAL CONSULTANT ROBERT S. BRIGHT PRESIDENT TALSON SOLUTIONS LLC AHIA 31 st Annual Conference August 26-29, 2012 Philadelphia PA

2 Agenda 2 Why the Audit? Controls for Capital Program Contract Types The Contract Construction Audit Strategy Audit Red Flags and Cost Recovery Best Practices Co-Sourcing

3 Why the Audit? 3 Lack of construction oversight Unfamiliar with construction industry practices Non-compliance to contracts / processes Failure to reconcile project financial reporting Inadequate cost estimates / contingency Reporting lacks critical information Excessive budget and / or schedule changes Potential for cost recovery Transparency is critical

4 Controls for Capital Programs 4 Project Scope Management Design Management age e Project Schedule Change Management Quality Management System Document Control Invoice Processing Project Reporting Defined Completion / Close-out out Processes

5 Contract Types 5 Type Lump Sum / Fixed Price Guaranteed Maximum Price (GMP) Characteristics Closed book Known costs upfront Monitor deliverables / changes Open book Defined actual costs Cost reconciliations

6 The Contract 6 Key Contract Provisions Scope of Work / Performance, Specifications Definitions - Technical and Financial (e.g., Cost of Work ) Payment Terms / Subcontractor Payment Schedule of Work / Deliverables Identification of Signature Authorities Change Order / Contingency Management Progress Reporting / Dispute Clauses

7 Construction Audit Strategy 7 Timing Depends on Objectives Construction - Early for Full Compliance Financial - Contract Close-out Lump Sum - Key Milestones / Deliverables TEAM Together Everyone Achieves More Owner.Auditor...Experts.Contractor.Management Essential Documents Executed Contract w/ Exhibits Subcontracts / Change Orders Updated Project Logs/ Reports / Schedules

8 Audit Red Flags 8 Continuous updating of budget / schedule Lack of project understanding Significant changes due to errors / missing data Data inconsistency Non-compliance to project change procedures Contingency draw-down not analyzed Continuous project forecast $$$ creep Missing Milestone dates Capex expenditure rate too slow / fast $ Cash Flow vs. Project Time Time Plan Actual

9 Cost Recovery 9 Change orders not resolved Lack of defined reimbursable cost Cost of the Work Accrued costs vs. actual cost / Lack of reconciliation Excessive open issues: design, quality, safety, changes Premium / overtime charges at incorrect rates Contractor unwillingness to produce reports Bonuses, training and unallowable expenses in hourly rates

10 Best Practices 10 Know your Objectives Know the Contract Read the Contract Involve Key Players / Experts Convert Observations to Risks Integrate Cost / Schedule Play the Hunch --- Peel the Onion Don t Ignore Audit follow-up

11 Co-Sourcing 11 Know client priorities Understand appetite for expert services Share knowledge / teach Identify critical issues / What is important? Influencer, not a decision-maker i Be transparent contact: rbright@talsonsolutions.com

12 INTERNAL AUDIT DEPARTMENT PERSPECTIVE DAVID SMALL DIRECTOR OF INTERNAL AUDIT THE CHILDREN S HOSPITAL OF PHILADELPHIA AHIA 31 st Annual Conference August 26-29, 2012 Philadelphia PA

13 Facilities Background 13 Manages new construction and renovations at main campus and off-site locations. The Department staff includes experienced engineers, architects, and support personnel. Works with external construction managers, architects, and other consultants to complete projects. Multiple l concurrent projects with significant ifi financial i exposure. Recently completed the construction of an eight-story y p g y research facility. An eight-story ambulatory care center is in progress.

14 Internal Audit Background 14 The Internal Audit Department is comprised of eight auditors with IT, revenue cycle, and finance knowledge. The current department structure was reestablished four years ago (July 2008). Historically, audits of facilities construction projects were performed by an external audit firm; only large construction projects were covered. The prior year Audit Plan included a first time co-sourced internal audit of a hospital floor conversion construction project. Going forward, co-sourced audits of both large and smaller-scale construction projects are planned.

15 Areas of Audit Focus 15 Contract Evaluation Key financial provisions are defined. General Conditions Costs are supported and labor burden rates are accurately applied. Change Orders Subcontractor labor and material costs are reasonable and supported. Markups are accurately applied. Allowances Applicable charges are tracked and unused amounts are returned. Other Cost Recovery Opportunities Buy-out savings and other cost reconciliations.

16 Other Audit Risk Considerations 16 Type of contractual arrangement. Budget development and monitoring. Competitive bidding and selection process. Insurance program. Sales tax and other taxes.

17 Program Implementation 17 Develop a Construction Strategy. Obtain management and Audit Committee endorsement. Determine staffing method (internal versus external), considering resource constraints and expertise requirements. Select and engage external consultants and determine funding. Determine roles and responsibilities for all involved stakeholders.

18 Key Items for Success 18 Defined Objectives Add Value Partnership with Stakeholders Proper Timing of Activities Transparency

19 19 QUESTIONS

20 Save the Date: August , nd Annual Conference Chicago, IL August 29,